Deferred tax
Deferred tax is a balance-sheet item representing the tax effect of temporary differences between an asset or liability's carrying amount and its tax base, capturing taxes expected to be paid or recovered in future periods.
See it move
A machine's carrying amount exceeds its tax base by €50,000 because tax depreciation has run faster than accounting depreciation. Multiplying that €50,000 temporary difference by a 25% tax rate gives a deferred tax liability of €12,500 — tax the company will pay in a future period, not today.
The formula
Variables
- Carrying amount of an item minus its tax base (€)
- Applicable tax rate (decimal)
A positive temporary difference (carrying amount exceeds tax base for an asset) produces a deferred tax liability; a negative one produces a deferred tax asset.
Check yourself
A machine costs €100,000 and is depreciated straight-line over five years in Vantage plc's accounts. For tax purposes the full cost is deductible in the year of purchase. At the end of year one the accounting carrying amount is €80,000 and the tax base is €0. The applicable tax rate is 20%. Which of the following correctly describes the deferred tax position at year end?